What is an angel investor group?
An angel investor group is simply a group (usually
between 10 and 150 wealthy individuals) that meets in order to pool knowledge
and resources for the purpose of investment in startup companies. These companies may be in the seed stage with
only a concept from which to work or they may be new businesses with some
revenue already.
Who are the angel investors?
Many times angels are retired businesspeople or exited
entrepreneurs who actively invest in companies close to them
geographically. Angel investors
typically are knowledgeable in the market or industry of their investments and
want to be involved with the daily operations.
However, performing the necessary due diligence on a large number of
companies take significant time and resources.
Angel investor groups are helpful to angels because of the additional
resources and support that can be provided.
Costs can be reduced with the help of these groups. Typically individual angels may invest
between $10,000 and $1,000,000 in a deal.
However, angel investor groups may combine resources to do even larger
deals more akin to venture capital firms.
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The Pros and Cons
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Pros – Angel groups will often get in the driver’s
seat with you and actually help you grow the company. It’s like getting lots of industry contacts for free. Also, they may be able to form a syndicate if a large amount of money is needed.
Cons – They are a lot more selective about the deals they
do, because they can only manage so many deals at once. It’s a lot
harder to land a Professional Angel, and they usually require more validation of your business plan than some private angels before investing.
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How can I find angel investor groups?
The first step for an entrepreneur is finding an angel
investor. Even with the widespread use
of technology, the vast majority of angels prefer to invest close to their
home, so an entrepreneur should start by looking for angels in the area. Numerous websites contain angel investor
groups categorized by location. One
example is www.goBIGnetwork.com. The Go
Big Network is an on-line marketplace that connects the startup and small
business community including job seekers, investors, advisors, and startup
companies. Membership is free, and for a
small fee access to a large number of investors and entrepreneurs is available.
In addition to the internet, referrals from local
professionals such as doctors, lawyers, accountants, and others can be helpful
in securing funding. If an entrepreneur
is allowed to use their name when contacting a potential investor, his plan
will be given more influence.
Entrepreneurs should look for accredited investors for
legal purposes. By the SEC definition,
this means the investor has a net worth of $1 million and has made at least
$200,000 each of the last two years with the reasonable expectation to do the
same for the current year. Especially if
an entrepreneur has little startup experience, he should seek an angel that
will be active in the company. An
investor providing only money is many times less desirable than one that wants
to be highly involved with the startup.
Angels are using their own money and want to see their startup
succeed. Thus many will use their
network to help get deals and provide advice based on their business experience. The combination can prove invaluable with
time.
What is the angel investing process?
After an entrepreneur has contacted an angel investor
initially, he or she will need to meet formally with the investor to propose
the venture in more detail.
Specifically, an angel will want to know the market size, why the
business is compelling, the marketing plan, management team, and exit
strategy. If the angel is interested, he
will evaluate the deal in greater detail through the due diligence process. He/she will want to review all relevant
details, which may include visiting the company location numerous times and
meeting the management team.
If the angel decides to invest, an investment agreement
will be drafted by his lawyer. The
entrepreneur should research typical agreements and have a lawyer review it
before agreeing to a contract. Even if
the angel decides against investing, he may be able to refer the entrepreneur
to other investors.
Very few entrepreneurs end up receive angel funding
relative to the number of deals the average investor sees.
Why are angel investors joining groups?
In the last ten years membership in angel groups has
increased significantly. Angel investors
join groups for several reasons.
Increasing deal flow, reading business plans, and performing due
diligence all require significant time.
Additionally, legal support is expensive. Angel investor groups allow the work to be
divided, providing angels with more time.
Many groups have standardized processes and term sheets, which also
reduces legal fees. Because of the
increased deal flow, investors can choose only deals in which they are
interested. Finally, many join for the
camaraderie that develops among like-minded individuals.
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Angel investor groups are great sources of revenue for many entrepreneurs. It may take persistence to set up an initial meeting, but the vast connections of the angels in the group could pay off tremendously. Remember that funding does not happen in a week or even a month. Usually it takes several months at the very least for the process to work.
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